After-tax cost of debt Bella Wans is interested in buying a new motorcycle. She has decided...

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After-tax cost of debt Bella Wans is interestedin buying a new motorcycle. She has decided to borrow money to paythe $25,000 purchase price of the bike. She is in the 25% federalincome tax bracket. She can either borrow the money at an interestrate of 5% from the motorcycle dealer, or she could take out asecond mortgage on her home. That mortgage would come with aninterest rate of 6%. Interest payments on the mortgage would be taxdeductible for Bella, but interest payments on the loan from themotorcycle dealer could not be deducted on Bella's federal taxreturn.
a. Calculate the after-tax cost ofborrowing from the motorcycle dealership.
b. Calculate the after-tax cost ofborrowing through a second mortgage on Bella's home.
c. Which source of borrowing is less costly forBella?
d. Is there any other consideration that Bellaought to think about when deciding which loan to take out to payfor the motorcycle?

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a Aftertax Cost of debt is the interest rate on the debt multiplied by 100 minus the incremental income tax rate In the given case loan amount is 25000 Federal income tax bracket is 25 Interest See Answer

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After-tax cost of debt Bella Wans is interestedin buying a new motorcycle. She has decided to borrow money to paythe $25,000 purchase price of the bike. She is in the 25% federalincome tax bracket. She can either borrow the money at an interestrate of 5% from the motorcycle dealer, or she could take out asecond mortgage on her home. That mortgage would come with aninterest rate of 6%. Interest payments on the mortgage would be taxdeductible for Bella, but interest payments on the loan from themotorcycle dealer could not be deducted on Bella's federal taxreturn.a. Calculate the after-tax cost ofborrowing from the motorcycle dealership.b. Calculate the after-tax cost ofborrowing through a second mortgage on Bella's home.c. Which source of borrowing is less costly forBella?d. Is there any other consideration that Bellaought to think about when deciding which loan to take out to payfor the motorcycle?